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Producer survey finds strong support for return to ‘higher-of’ formula

Progressive Dairy Editor Dave Natzke Published on 16 November 2021

Preliminary results from an online survey of dairy producers found strong support for a return to the “higher-of” Class I mover pricing formula, even though in recent months producers have realized a small net benefit from the “average-of plus 74 cents” formula that replaced it in 2019.

With questions continuing to swirl around the Federal Milk Marketing Order (FMMO) Class I milk pricing formula, the American Dairy Coalition (ADC) launched an online survey in late October and is still accepting responses.

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The formula change, from the higher-of advanced Class III-Class IV skim milk prices to the average-of plus 74 cents advanced Class III-Class IV skim milk prices formula, was implemented in May 2019. Because the change was made through Congress and the 2018 Farm Bill, without FMMO hearings and without a producer referendum, the ADC poll seeks to determine what producers would prefer until a hearing process can be initiated and completed to evaluate past, present and proposed options.

Based on the preliminary results, about 85% of survey respondents favored going back to the higher-of formula.

ADC said preliminary poll responses were received from producers in 10 of the 11 FMMOs (all but Arizona FMMO #131), with the heaviest participation from the Upper Midwest and Northeast. Respondents represented all herd sizes – from under 100 cows to over 2,000 cows. Of the respondents so far, 74% were dairy owners and 19% were partners, with the balance representing managers, family members or employees doing financial planning.

Among ADC poll respondents, 72% said the change in the Class I formula had negatively impacted their business planning; 18% said they had been positively affected; and 10% said the change had no effect. On the topic of risk management, 74% said the change had weakened their confidence and ability to do risk management; 19% said risk management was strengthened; and 7% said it has had no effect.

Past trends, future outlooks

Compared to the previous formula, ADC had estimated FMMO Class I prices paid to dairy producers were lower in 16 of the first 26 months the new formula was implemented, affecting FMMO blend prices and pooling and reducing producers’ abilities to effectively utilize risk management tools.

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Since July 2021 and likely running through at least November, the narrower spread the advanced Class III-IV skim milk price means the average-of plus 74 cents formula has provided a net benefit to producers in the advanced FMMO Class I price.

Recent market changes have widened the potential spread between Class III-IV prices in December 2021 and January 2022 before narrowing again in February and beyond. However, it’s difficult to predict factors affecting the Class I price based on Class III-IV milk futures prices.

The Class III advanced skim milk price is calculated using prices for protein, other solids derived from cheese and a butterfat factor. The Class IV advanced skim milk price incorporates prices for nonfat dry milk.

ADC contends most of futures prices over the next 12 months currently show enough diversion between Class III-IV milk prices to make the average-of plus 74 cents formula neutral on milk checks, instead of adding to farmer pay prices.

Read: October brought return of depooling, negative PPDs.

And, even if the current formula provides a small net benefit to FMMO blend prices, the upside benefit is capped at about 20 cents per hundredweight (cwt) nationally, ADC said. As witnessed in the first two years of implementation, the downside risk is far greater, according to ADC.

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Read: Changing market conditions don’t quell concern over Class I price formula.

Although several proposals have been floated by dairy organizations throughout the U.S., there’s been no formal petition seeking a FMMO hearing on the Class I formula. The Class I formula, as well as other pricing and policy issues, will be discussed at the National Milk Producers Federation’s annual meeting this week in Las Vegas, Nevada, noted senior vice president of communications, Alan Bjerga.

ADC said it will share final survey results and analysis and plans future surveys on milk pricing and marketing.  end mark

Dave Natzke
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